Should we be “Scared of Capitalism?”

Physicists Should Stick to Physics

We know already since Einstein that renowned physicists would do better to avoid straying into the field of economics. In 1949 Einstein published an essay on economics and education that is brimming with ignorance. According to Einstein, “The economic anarchy of capitalist society [is] the real source of evil”. Any old Marxist could have written that of course – the “capitalist anarchy of production” was routinely mentioned as an alleged drawback by Marxists, one that their “scientific” central economic planning would overcome.

Albert Einstein: great physicist, terrible economist.

Photo credit: Steffen Kugler / Getty Images

This conviction eventually cost the lives of hundreds of millions of people and utterly bankrupted half of the world for good measure. A representative quote from Einstein’s article:

“I am convinced there is only one way to eliminate these grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals. In such an economy, the means of production are owned by society itself and are utilized in a planned fashion. A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child.”

We have no idea what possessed Einstein to write this clap-trap. Was he not aware, in 1949, of the evils perpetrated by Stalin and the planners of the Soviet Union? Had he not heard of the purges, the famines and the Gulag?

There should be no need to mention that Ludwig von Mises already showed in 1920 that economic calculation isliterally impossible in a society in which the State is the sole owner of the means of production. Moreover, a vigorous debate between F.A. Hayek and Lionel Robbins on the one side, and assorted supporters of central economic planning such as Oskar Lange and Henry Dickinson on the other side had been raging between the mid 1930s and early 1940s (previously Marxist writers had proscribed such debates on the basis of polylogism).

Possibly Einstein wasn’t aware of this debate, but a salient feature of it was that the socialist planners had been forced to retreat step by step, until in the end, the only proposal they were left with was that the central planning agency should try to “imitate a market”. As Mises remarked on this later (in Human Action, which incidentally was also published in 1949):

“What these neo-socialists suggest is really paradoxical. They want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act as if these things were still present.

They want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate.”

(italics in original)

If the socialists had succeeded in establishing socialism globally after the Russian revolution, the world would have been back in something resembling the stone age within a few short years. Society would have fallen apart, people would have been forced to lead a hand-to-mouth existence, barely subsiding. The only reason why the communists held on for as long as they did was that socialism was not implemented on a global scale. The planners were therefore able to observe prices in the capitalist societies, allowing them to engage in a rudimentary form of economic calculation.

Polish economist and “Market socialist” Oskar Lange: he lost the socialist calculation debate and didn’t even realize it, as he simply failed to grasp the essence of the argument. Poland’s economy was duly run into the ground by his fellow socialists.

Photo credit: Władysław Miernicki

It is truly remarkable how deeply embedded socialist thought remains in society to this day, in spite of the downfall of the socialist Prison State in the late 1980s/early 1990s, after its utter bankruptcy could no longer be concealed (as an aside, we plan to soon post another article on the enduring popularity of collectivism, a phenomenon that strikes us as more than passing strange). Thus yet another popular and renowned physicist, namely Stephen Hawkins, has jumped into the debate, seemingly attacking capitalism. According to the Huffington Post, “Stephen Hawking Says We Should Really Be Scared Of Capitalism, Not Robots”.

To paraphrase Albert Jay Nock, it is downright absurd that socialist ideas are still so unquestioningly accepted that one is actually forced to discuss and defend capitalism, as if there were any other type of economy! An economy cannot be anything but capitalistic; without economic calculation, there is simply no rational economy to discuss. It makes no sense to call any other system an “economy”.

It follows that the only people who have reason to discuss the viability of the capitalist system are those who want to return to a hunter-gatherer lifestyle. But they can do that without trying to enforce their nonsense on anyone else. Surely there is enough room in the Amazon forest. If a handful of morons eager to shun civilization want to ship themselves there, we imagine no-one would object (such as e.g. the insane eco death-cult of Paul Kingsnorth in the UK; they probably wouldn’t do it though, due to the lack of wall plugs needed to recharge the batteries of their iPhones).

Production and Distribution are not Separate Activities

We are not sure why Mr. Hawking would object to capitalism. Does he not realize that without the free market economy (hampered as it is nowadays), there would be no modern physics as we know it? That the radio telescopes and the particle accelerators used by experimenters to check the validity of his theories wouldn’t exist?

Stephen Hawking, world-renowned theoretical physicist. He has inter alia published books on physics even laymen can enjoy, and which we highly recommend.

“Machines won’t bring about the economic robot apocalypse — but greedy humans will, according to physicist Stephen Hawking. In a Reddit Ask Me Anything session on Thursday, the scientist predicted that economic inequality will skyrocket as more jobs become automated and the rich owners of machines refuse to share their fast-proliferating wealth.

“If machines produce everything we need, the outcome will depend on how things are distributed. Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution. So far, the trend seems to be toward the second option, with technology driving ever-increasing inequality.”

Essentially, machine owners will become the bourgeoisie of a new era, in which the corporations they own won’t provide jobs to actual human workers.

As it is, the chasm between the super rich and the rest is growing. For starters, capital — such as stocks or property — accrues value at a much faster rate than the actual economy grows, according to the French economist Thomas Piketty. The wealth of the rich multiplies faster than wages increase, and the working class can never even catch up. But if Hawking is right, the problem won’t be about catching up. It’ll be a struggle to even inch past the starting line.”

(the emphasized part are Hawking’s own words)

First of all, as we have discussed in these pages on many occasions, inequality cannot possibly be a problem as such (here is an example from 2011: “Wealth and Income Inequality in the US”). It may produce envy, but that doesn’t mean inequality is a problem – envy is.

Let us simply consider two hypothetical societies. In one of them, every inhabitant makes the equivalent of $1,000 per month. Perfect equality! In another, three people make $6,000 per month each, while the rest make $2,000 each. Bad, bad, bad….there are three rich people! Rhetorical question: which one do you think people would prefer to live in?

The reason why inequality is seen as a problem nowadays, is that the incomes of the middle class and the poor have stagnated or even declined since the adoption of the full-fledged fiat money system in the 1970s, while already rich owners of assets have seen their wealth and income soar. Had everybody’s wealth increased, even if at unequal rates, there would be precisely zero reason to complain.

What is the reason for this deplorable development? It certainly isn’t the fact that the “machine-owners” (read: capitalists) have successfully lobbied against wealth redistribution” as Mr. Hawking avers. As a matter of fact, in the US a tiny minority of the population pays the vast bulk of the taxes the State then redistributes. As of 2015,the top 20% of income earners pay 84% of all income tax. It seems their “lobbying against wealth redistribution” hasn’t been all that successful so far.

The bottom 20% (up to annual earnings of $47,300) pay no income tax at all – on the contrary, they receive a net income tax benefit. The slightly dated chart below shows the situation as of 2012 (it shows the bottom 50% as a single group, so one doesn’t see the tax beneficiaries, but it also shows a more finely grained overview of the top earners and how much they are paying).

Wealth redistribution hardly seems to be a “problem” (chart by Erik Soderstrom) – click to enlarge.

As Murray Rothbard notes in Man, Economy and State, in a free market there is no such thing as “distribution” that is separate from production:

“The theory of the market determines the prices and incomes accruing to productive factors, thereby also determining the “functional distribution” of the factors. “Personal distribution”— how much money each person receives from the productive system—is determined, in turn, by the functions that he or his property performs in that system. There is no separation between production and distribution, and it is completely erroneous for writers to treat the productive system as if producers dump their product onto some stockpile, to be later “distributed” in some way to the people in the society. “Distribution” is only the other side of the coin of production on the market.

Many people criticize the free market as follows: Yes, we agree that production and prices will be allocated on the free market in a way best fitted to serve the needs of the consumers. But this law is necessarily based on a given initial distribution of income among the consumers; some consumers begin with only a little money, others with a great deal. The market system of production can be commended only if the original distribution of income meets with our approval.

This initial distribution of income (or rather of money assets) did not originate in thin air, however. It, too, was the necessary consequence of a market allocation of prices and production. It was the consequence of serving the needs of previous

consumers. It was not an arbitrarily given distribution, but one that itself emerged from satisfying consumer needs. It too was inextricably bound up with production.”

(italics in original)

Murray Rothbard: production and distribution are not separate activities

This leaves the question why the real incomes of the middle class and the poor have stagnated and declined – and the answer was already implicit in what we wrote further above. It is the unfettered fiat money inflation that has been in train since Nixon’s gold default that is to blame. Newly printed money always enters the economy at discrete points, and there will be earlier and later receivers of this money. Wealth will be redistributed from the latter to the former. The rich are in a better position than the poor, as asset prices tend to rise earlier and disproportionately relative to other prices. However, the central bank and its fiat money system are not capitalist free market institutions – they are socialist central planning agencies and tools.

It seems to us Mr. Hawking should be worried about socialism, not about capitalism. To be fair, we cannot really see as strong an indictment of capitalism in Mr. Hawking’s words as insinuated by the HuffPo’s author and the title of his article. Hawking definitely sounds a lot more harmless than Einstein did. However, he still seems to be advocating some sort of forcible wealth redistribution – plenty of which is already occurring.

Fear of Robots and the Problem of Scarcity

Hawking also seems to some extent express the fear of modern-day Luddites, that “robots will take all our jobs”. First of all, economic activity is primarily about producing more with less. It is about “economizing” – to relieve us of the drudgery of the pre-capitalistic order is its very object. It is absurd to complain and worry about its success in this department. The assertion that machines will “steal jobs” is of course as old as the first machines.

And yet, in spite of ever greater progress and ever more work being done by machines, human prosperity has continued to increase (by any measure one can possibly apply). Instead of jobs simply “disappearing”, different and better ones have taken their place. No-one can as of yet know what industries there will be in the future. No-one knew in 1990 that one day, a “social media company” would employ 10s of thousands of people and earn $10 billion per year.

Simply put, as long as there is more land (in the widest sense) than there are people on the planet, labor will always remain a scarce resource. What unemployment there is, is in part catallactic (voluntary), while the rest consists of “institutional” unemployment. The latter is to 100% the result of government intervention in the economy and specifically the labor market – it is not a result of capitalism or technological progress.

We also want to briefly address the belief that “robots will do all the work and produce everything”, the implied assertion that these production processes will somehow come for free, and that therefore only the “distribution question” remains. It is in a sense true that we are no longer constrained by a scarcity framework as long as we have a capitalist system. As Israel Kirzner wrote in this context in Discovery and the Capitalist Process –encapsulating both what we said above regarding the as of yet unknown future and the fact that capitalism is not confined by the problem of scarcity:

“We are not able to chart the future of capitalism in any specificity. Our reason for this incapability is precisely that which assures us . . . the economic future of capitalism will be one of progress and advance. The circumstance that precludes our viewing the future of capitalism as a determinate one is the very circumstance in which, with entrepreneurship at work, we are no longer confined by any scarcity framework. It is therefore the very absence of this element of determinacy and predictability that, paradoxically, permits us to feel confidence in the long-run vitality and progress of the economy under capitalism.”

However, “not confined” doesn’t mean that scarcity has all of a sudden ceased to exist. If not for scarcity, there would be no need to allocate resources properly. In fact, there would be no economic goods and no prices. We may not be confined by scarcity under capitalism, but we still have to deal with it; it is a fact of life.

A stern looking Israel Kirzner. Kirzner’s has produced highly interesting works on the entrepreneurial process, partly based on Hayek’s ideas about the role of knowledge in society

What many of the “robot worriers” overlook is that while we have enormous knowledge, and in theory could probably automate a great many production processes that are as of yet not automated, we are still faced with the fact that capital is scarce. The main reason why e.g. the Central African Republic is not at the level of development of an industrialized nation is precisely that it lacks capital. In other words, it is not “technology” or know-how that is the obstacle to the Utopia Hawking imagines to come into being – it is scarcity.

Caution, job thief!

Image credit: DARPA

However, if the problem of scarcity were licked once and for all, why should there still be a problem ofdistribution? As we noted above: scarcity is why there are economic goods that have prices. The air we breathe is an example of a non-scarce good. Has anyone ever worried about its “distribution”? If there is no longer any scarcity, i.e. once Utopia or the Land of Cockaigne has been achieved, everything will indeed come for free. There will no longer be anything worth stealing and redistributing.

Conclusion

Stephen Hawking is undoubtedly a nice man and a genius in his field. This is probably also the field he should stick with. Anyway, we can lay his worries to rest: once there is no longer scarcity in the world, nobody will have reason to worry about wealth redistribution. Of course, it’s also not going to happen anytime soon and probably never will. There is also no reason to worry about employment while at least vestiges of a free market exist: as long as there remain unsatisfied human wants and as long as there are more resources than people, everybody will find work. The only real problem is government intervention in the market process.